Commercial Banks

Definition 1. A commercial bankis a financial intermediary which collects credit from lenders in the form of deposits and lends in the form of loans. A commercial bank holds deposits for individuals and businesses in the form of checking and savings accounts and certificates of deposit of varying maturities while a commercial bank issues loans in the form of personal and business loans as well as mortgages. The term commercial bank came about as a way to distinguish it from an "investment bank. Difference b/w commercial banks and investment banks "The primary difference between a commercial bank and its counterpart is that a commercial bank earns revenue by issuing primary loans from its pool of deposits while an investment bank brings debt and equity offerings to market for a fee. Among its assets, including loans, a commercial bank holds a portfolio of other securities to generate proprietary income

Introduction of Commercial Banks

2.Commercial banking activates are different than those of investment banking, which include underwriting, acting as an intermediary between an issuer of securities and the investing public, facilitating mergers and other corporate reorganizations, and also acting as a broker for institutional clients.

Explanation

State bank or National Bank owned by stockholders that accepts demand deposits makes commercial and industrial loans, and performs other banking services for the public. The term commercial bank is synonymous with Full Service Bank because many commercial banks supply trust services, foreign exchange, trade financing, and international banking. Most state chartered trust companies are also commercial banks. Commercial bank deposits are insured by the Bank a federal insurance fund managed by the Federal Deposit Insurance Corporation. See also Independent Bank; Nonbank Bank; Securities Affiliate. A financial institution authorized to provide a variety of financial services, including consumer and business loans (generally short-term), checking services, credit cards and savings accounts. Certain deposits at most commercial banks are insured by the Federal Deposit Insurance Corporation. Commercial banks may be members of the Federal Reserve System. Example: Although commercial banks do make long-term mortgage loans, they have traditionally concentrated on short-term loans and are good sources for home-improvement loans and second loans secured by home equity. Bank that makes loans to businesses, consumers, and no business institutions. Early commercial banks were limited to accepting deposits of money or valuables for safekeeping and verifying coinage or exchanging one jurisdiction's coins for another's. By the 17th century most of the essentials of modern banking, including foreign exchange, the payment of interest, and the granting of loans, were in place. It became common for individuals and firms to exchange funds through bankers with a written draft, the precursor to the modern check. Because a commercial bank is required to hold only a fraction of its deposits as cash reserves, it can use some of the money deposited by its customers to extend loans. Commercial banks also offer a range of other services, including savings accounts, safe-deposit boxes, and trust services.

Banking

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A commercial bank is a type of financial intermediary and a type of bank. Commercial banking is also known as business banking. It is a bank that provides checking accounts, savings accounts, and money market accounts and that accepts time deposits.[1] After the Great Depression, the U.S. Congress required that banks engage only in banking activities, whereas investment banks were limited to capital market activities. As the two no longer have to be under separate ownership under U.S. law, some use the term "commercial bank" to refer to a bank or a division of a bank primarily dealing with deposits and loans from corporations or large businesses. In some other jurisdictions, the strict separation of investment and commercial banking never applied. Commercial banking may also be seen as distinct from retail banking, which involves the provision of financial services direct to consumers. Many banks offer both commercial and retail banking services.

Contents • • • •

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1 Possible meanings 2 Origin of the word 3 The role of commercial banks 4 Types of loans granted by commercial banks ○ 4.1 Secured loan  4.1.1 Mortgage loan ○ 4.2 Unsecured loan 5 References 6 See also 7 Further reading 8 External links

Possible meaning This is what people normally call a "bank". The term "commercial" was used to distinguish it from an investment bank. Since the two types of banks no longer have to be separate companies, some have used the term "commercial bank" to refer to banks that focus mainly on companies. In

some English-speaking countries outside North America, the term "trading bank" was and is used to denote a commercial bank. During the great depression and after the stock market crash of 1929, the U.S. Congress passed the Glass-Seagull Act 1933-35 (Khambata 1996) requiring that commercial banks engage only in banking activities (accepting deposits and making loans, as well as other fee based services), whereas investment banks were limited to capital markets activities. This separation is no longer mandatory. It raises funds by collecting deposits from businesses and consumers via checkable deposits, savings deposits, and time (or term) deposits. It makes loans to businesses and consumers. It also buys corporate bonds and government bonds. Its primary liabilities are deposits and primary assets are loans and bonds. •

Commercial banking can also refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses, as opposed to normal individual members of the public (retail banking).

Origin of the word The name bank derives from the Italian word banc "desk/bench", used during the Renaissance by Florentine bankers, who used to make their transactions above a desk covered by a green tablecloth. However, traces of banking activity can found even in ancient times. In fact, the word traces its origins back to the Ancient Roman Empire, where moneylenders would set up their stalls in the middle of enclosed courtyards called macula on a long bench called a banc, from which the words banc and bank are derived. As a moneychanger, the merchant at the banc did not so much invest money as merely convert the foreign currency into the only legal tender in Rome- that of the Imperial Mint.

The role of commercial banks Commercial banks engages in the following activities: •

processing of payments by way of telegraphic transfer, EFTPOS, internet banking, or other means

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issuing bank drafts and bank cheques

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accepting money on term deposit

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lending money by overdraft, installment loan, or other means

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providing documentary and standby letter of credit, guarantees, performance bonds, securities underwriting commitments and other forms of off balance sheet exposures

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safekeeping of documents and other items in safe deposit boxes

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sale, distribution or brokerage, with or without advice, of insurance, unit trusts and similar financial products as a “financial supermarket”

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Traditionally, large commercial banks also underwrite bonds, and make markets in currency, interest rates, and credit-related securities, but today large commercial banks usually have an investment bank arm that is involved in the mentioned activities.

Types of loans granted by commercial banks Secured loan

A secured loan is a loan in which the borrower pledges some asset (e.g., a car or property) as collateral (i.e., security) for the loan. Mortgage loan A mortgage loan is a very common type of debt instrument, used to purchase real estate. Under this arrangement, the money is used to purchase the property. Commercial banks, however, are given security - a lien on the title to the house - until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it. In the past, commercial banks have not been greatly interested in real estate loans and have placed only a relatively small percentage of their assets in mortgages. As their name implies, such financial institutions secured their earning primarily from commercial and consumer loans and left the major task of home financing to others. However, due to changes in banking laws and policies, commercial banks are increasingly active in home financing. Changes in banking laws now allow commercial banks to make home mortgage loans on a more liberal basis than ever before. In acquiring mortgages on real estate, these institutions follow two main practices. First, some of the banks maintain active and well-organized departments whose primary function is to compete actively for real estate loans. In areas lacking specialized real estate financial institutions, these banks become the source for residential and farm mortgage loans. Second, the banks acquire mortgages by simply purchasing them from mortgage bankers or dealers. In addition, dealer service companies, which were originally used to obtain car loans for permanent lenders such as commercial banks, wanted to broaden their activity beyond their local area. In recent years, however, such companies have concentrated on acquiring mobile home loans in volume for both commercial banks and savings and loan associations. Service companies obtain these loans from retail dealers, usually on a nonrecourse basis. Almost all bank/service company agreements contain a credit insurance policy that protects the lender if the consumer defaults.

Unsecured loan Unsecured loans are monetary loans that are not secured against the borrowers assets (i.e., no collateral is involved). These may be available from financial institutions under many different guises or marketing packages: •

bank overdrafts

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corporate bonds

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credit card debt

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credit facilities or lines of credit

Functions of Commercial Banks The major functions of commercial banks have been described in Chapter IV as the testing and guaranty of credit, and the extension of credit by means of notes, deposits, and acceptances. Commercial banks extend short-time loans, handle short-time mercantile paper, receive deposits

subject to check, issue bank notes, issue letters of credit, and accept bills drawn upon themselves. In carrying on these main activities many incidental services are performed for customers. In a circular published recently a metropolitan bank advertised "forty-three separate service divisions - all working for a single object, namely, to render a powerful and well-balanced banking service." In their competition for business, banks adapt their services to their actual and prospective customers' needs, adding feature after feature. •

In this point of service, by the way, there is probably opportunity for both the large and small banks. The smaller banks can render their fewer customers services that are probably more intimate and personal than the great metropolitan banks, whereas the latter can offer facilities more powerful, varied, complete, and expert.

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The accessory and minor functions of commercial banks will be discussed in detail in the body of this text. The nature of these functions appears in the statement that from his bank the business man receives the ready accommodation of a loan or the prompt cash conversion of commercial papers; he finds it convenient to keep his money and make his payments at the bank; he is advised in the purchase and sale of securities and their handling; the bank assembles vast credit files which are open to him; his funds are transmitted over distances, his foreign trade is facilitated, his business operations planned and guided for him.

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From the point of view of economics, bank credit obviates the use of metallic money and conserves the metals for use in the arts; it facilitates the production, movement, and exchange of goods more effectually even than money does; it stabilizes credit, resting it upon longestablished, widely extended, conservatively managed institutions. The banker determines the personnel of the business world, by extending credit to persons of character and capacity and by choosing as debtors those who have either proved abilities or give reasonable promise. Capital is thus diverted into channels and hands where it is most productive and most useful to society. The bank assembles the stray and hoarded funds of the country into its vaults and puts them to productive use. Capital is thereby conserved. The benefits of thrift are taught and the importance and equity of keeping contracts to the letter are brought home to the commercial world.

What are the depository functions of commercial banks? C ommercial Bank 1. Receiving Deposits: This is the main function of commercial banks to collect savings of individuals and firms. They offer different types of deposits for the facility of the customers. I. Current Account or Demand Deposits: Any amount can be withdrawn from this account any time without any notice. No interest is allowed on this type of account. ii. Saving Account: This type of deposit account which is usually held by the middle class group. The saving account carries lower rate of interest. iii. Fixed Deposit: Amount cannot be withdrawn before the fixed future date in this type of deposit. High interest is allowed in fixed deposit which is different according to period. 2. Advancing Loans:

This is the important function of the commercial bank. Credit is given to the people in different ways. (a.): Making Loans: There are three types of loans given to borrowers. i. Short Term Loans: These loans are advanced for the period of six months to one year. High Interest rate Is charged on this type of accounts. ii. Medium Term Loans: Loans from one to five years are called medium term loans. iii: Long Term Loans: Loans which are advanced for the period, more than ten years are long term loans. (b.): Bank Overdraft: Banks allows their trustful customers to draw more than the deposit they have in the Bank. Bank charges interest on overdraft. (c.): Cash Credit: Bank also gives credit against immovable property and interest is charged by the bank. (d.): Discounting of Bills: This is income source of bank to discount bills of exchange. They charge nominal Interest and discount only reputed and clear bills of exchange. • Commercial Bank 1. Receiving Deposits: This is the main function of commercial banks to collect savings of individuals and firms. They offer different types of deposits for the facility of the customers. i. Current Account or Demand Deposits: Any amount can be withdrawn from this account any time without any notice. No interest is allowed on this type of account. ii. Saving Account: This type of deposit account which is usually held by the middle class group. The saving account carries lower rate of interest. iii. Fixed Deposit: Amount cannot be withdrawn before the fixed future date in this type of deposit. High interest is allowed in fixed deposit which is different according to period. 2. Advancing Loans: This is the important function of the commercial bank. Credit is given to the people in different ways. (a.): Making Loans: There are three types of loans given to borrowers. i. Short Term Loans: These loans are advanced for the period of six months to one year. High Interest rate Is charged on this type of accounts. ii. Medium Term Loans: Loans from one to five years are called medium term loans.

iii: Long Term Loans: Loans which are advanced for the period, more than ten years are long term loans. (b.): Bank Overdraft: Banks allows their trustful customers to draw more than the deposit they have in the Bank. Bank charges interest on overdraft. (c.): Cash Credit: Bank also gives credit against immovable property and interest is charged by the bank. (d.): Discounting of Bills: This is income source of bank to discount bills of exchange. They charge nominal Interest and discount only reputed and clear bills of exchange.

History of Muslim Commercial Bank In 2007, MCB reported a profit after tax of PKR16.4 billion (US$270 million) and generated a return on average equity of 38% and a net interest margin of 8.08%. The Bank’s asset quality is strong with a gross NPL ratio of 4.7% and provision coverage of 100%. During the last fifteen years, the Bank has concentrated on growth through improving service quality, investment in technology and people, utilizing its extensive branch network, developing a large and stable deposit base and managing its non-performing loans via improved risk management processes. In 2005, the management of the bank changed its name from Muslim Commercial Bank Limited to MCB Bank Limited (MCB). The reason was to explore international markets as they were facing resistance specially from Western Countries to avail license. In 2008 the head office of MCB was shifted to Lahore in a newly constructed building, namely MCB House, located at Sharea Ghous-ul-Azam (formerly known as Jail Road) from Karachi. The MCB Tower in Karachi serves as the MCB's headquarters, and is also the tallest building in Pakistan. MCB, advised by Merrill Lynch, became the fourth Pakistani company (the other three being Hubco, PTCL and Chakwal Cement - they all have been delisted) to list on the London Stock Exchange when it raised US$150 million global depositary receipts. In May 2008 Malaysian bank, Maybank and MCB sponsors Nishat Group signed an agreement, whereby Maybank will acquire up to 20% of the ordinary shares in MCB from Nishat Group. The acquisition is in-line with Maybank’s strategy, as Malaysia’s financial services leader in the region, to build its presence in key growth markets across the region. It also paves the way for MCB, one of Pakistan’s premier financial services groups, to engage Maybank as its exclusive foreign commercial bank strategic partner. Maybank initially acquired from Nishat Group 94,241,527 ordinary shares in MCB, representing a 15% stake in the Bank, for a cash price of PKR470 per share. The total consideration paid was approximately US$686 million. The purchase price represented a 11.4% premium to MCB’s closing share price of PKR 422 on May 2, 2008, and a premium of 12.9% to the average closing share price for MCB over the 30 trading days immediately preceding the date of this announcement.

Based on MCB’s December 31, 2007 audited book value, the purchase price represents an implied price to book value multiple of 5.13x, a price to 2007 earnings multiple of 18.0x and a price to 2008 earnings multiple of 15.2x. In July 2008 Maybank exercised its right to increase its stake to 20%. The stake in MCB allows Maybank the right to appoint two Directors to represent its interest on the Board of MCB. One of these Directors was to be appointed immediately and the second Director will be appointed upon completion of the term of the existing Board, scheduled to be on March 27, 2009. As part of the transaction, Maybank and MCB are also expected to enter into a business cooperation arrangement which will include, among others, Islamic banking, retail banking, credit cards, asset management and SME banking. Leveraging Maybank’s leadership and experience in these segments coupled with MCB’s brand and broad distribution network, Maybank and MCB believe that significant revenue synergies can be attained. Both Maybank and MCB are also expected to benefit from increased business ties and trade flows between Pakistan and Malaysia MCB Ltd formerly known as Muslim Commercial Bank Limited was incorporated by the Adamjee Group on July 9, 1947, under the Indian Companies Act, VII of 1913 as a limited company. The bank was established with a view to provide banking facilities to the business community of the South Asia. The bank was nationalized in 1974 during the government of Zulfikar Ali Bhutto. This was the first bank to privatized in 1991 and the bank was purchased by a consortium of distinguished Pakistani corporate groups led by Nishat Group. As of June 2008, the Nishat Group owns a majority stake in the bank. The president of the bank is Mr. Atif Bajwa (previously with Citibank). Founded in 1948, Nishat Group is one of the leading and most diversified business groups in Pakistan. The group has strong presence in the most important business sectors of the country such as banking, textile, cement and insurance. Mian Mohammad Mansha is the Chairman of the group (and also MCB) and has played instrumental role in its success. In recognition of Mr. Mansha’s contribution, the Government of Pakistan has conferred him with "Sitara-e-Imtiaz", one of the most prestigious civil awards of the country. MCB is Pakistan’s fourth largest bank by assets having an asset base of US$6.7 billion, and the largest by market capitalization having a market capitalization of US$4.1 billion. The Bank has a customer base of approximately 4 million and a nationwide distribution network of 1,026 branches, including 8 Islamic banking branches, and over 300 ATMs, in a market with a population of 160 million.